MLR rebates are paid to the policyholder. That means the rebate will be distributed to the plan sponsor/employer of a group health plan. The plan sponsor will then have to determine whether a portion of the rebate is a “plan asset” as determined under ERISA. This is important because an ERISA plan asset must be used for the benefit of the plan participants and otherwise treated in a manner that complies with the ERISA fiduciary obligations applicable to handling plan assets.
In Technical Release 2011-04, the Department of Labor says that in the absence of more direct evidence (for example., specific plan language addressing rebates), the portion of the rebate that reflects participants’ contributions generally is a plan asset and must either be returned to the participants or used exclusively for their benefit.
For example, if the employer paid 60 percent of the premium and the participants paid 40 percent, the rebate would be allocated 60% to the employer and 40% to the participants.
DOL Guidance Gives Employer/Plan Sponsors Flexibility in Handling Rebate Amounts
The guidance also states that an employer has some flexibility in allocating a rebate, as long as its course of action is reasonable. For example, if the cost of distributing a rebate to former participants is more than the amount of the rebate, then the employer can limit distributions to current participants. The guidance states that employers must use a “reasonable, fair and objective allocation method” to distribute rebate amounts.
Further, plan sponsors/employers don’t have to make a direct cash distribution if it reasonably determines that it would be better put towards future premium payments or enhancing future plan benefits.
That means that as long as the participants’ share of the rebate is used in a reasonable manner to benefit current or former participants, the employer/plan sponsor will meet the DOL guidance requirements.
Sponsors of church and governmental plans are effectively subject to similar requirements, even though they are not subject to ERISA.
Timing of Disbursement and the ERISA Trust Requirement
Guidance states that employers can take up to three months to either pay premiums or make refunds to participants. If the amounts aren’t used or distributed within this time frame, the employer will need to establish a separate trust account to hold the plan assets.
If you have additional questions, please contact your Benefits Consultant.